Micron Focuses On The Future, But Its Stock Is Shackled To The Present

Micron Technology shared its view of the memory market, technology trends and company strategy at an analyst conference last week where executives stressed the company's R&D investments and product roadmaps designed to exploit changing customer requirements and new memory applications. The backdrop is a decelerating market, with expected DRAM (volatile system memory) and NAND (nonvolatile storage) growth rates less than half that of a decade ago, but one that is evolving from a commodity business of undifferentiated widgets to a diversified set of memory tailored to systems and applications with very different needs. While the company painted a rosy picture of future prospects, investors are more concerned with the here and now where ASPs (average selling price) are falling and the largest market for DRAM, PCs, is "challenging". Micron's lackluster Q3 financial results, what one Forbes contributor described as "dismal", triggered a 30% decline in the company's stock in the intervening weeks.

The anchor shackling Micron to the present is the company's continued heavy reliance on DRAM, particularly for the consumer PC market, where the company's sales fell 2% in the latest quarter while prices dropped 10%. With DRAM comprising 61% of revenue and Windows 10 sales already flatlining, it's no wonder one Wall Street analyst wrote that "the benefits MU will see in FQ1 from PC refresh (Win 10), client SSDs, and seasonal uplift in mobile handsets (i.e., iPhone 6s) will be more muted due to the uncertain macro, F/X headwinds, and tough competitive landscape."

Micron remains optimistic, showing analysts that memory continues a long-term trend of increasing its share of the overall semiconductor market, however, much of the analyst day material showed how the nature of memory products and sales mix will be very different four years from now. These shifts are behind Micron's planned 2016 CapEx expenditures of over $5.3 billion, a number that spooked investors, since significant amount of R&D and production equipment upgrades will be required to successfully adapt to changing customer requirements and competitive pressures.

NAND buyers in both the mobile and data center markets can't get enough capacity: Here, Micron has partnered with
Intel on a 3D NAND process that DeBoer says it can scale for the next decade and enable 10TB and up SSDs.

New types of memory products: The recently announced 3D XPoint memory, another joint development with Intel, promised the speed and durability of DRAM with the density and nonvolatility of NAND. At IDF, Intel demonstrated a 3D XPoint PCIe SSD that provides 5-times the I/O throughput of its high-end NAND SSD. Micron has also developed the hybrid memory cube, a multichip package combining a stack of traditional DRAM chips with a unique logic layer that can provide 15-times the I/O bandwidth of a standard DDR3 module while using 70% less power.

Micron's analyst presentation highlighted three growing markets targeted by its expanding product portfolio: mobile devices, automotive and data centers. For mobile, the company has a line of low power DRAM, NOR flash (an alternative to NAND that is both faster and that allows memory cells to be individually accessed instead as entire blocks) and hybrid multichip packages (MCP) mixing fast, low power DRAM and high-capacity NAND. Micron tweaks its mobile products for the automotive and IoT markets by tailoring the features and specs to each segment's unique design requirements: for example, 10-year longevity and reliability for car systems and ultra-low power for IoT.

Even Micron's bread and butter commodity DRAM market is fragmenting. By 2019, the company expects total DRAM demand by mobile handsets and data centers to significantly outstrip that for PCs. The upshot of Micron's analyst presentation is how the company's business is evolving from a reliance on bulk commodity memory, whether DRAM or NAND, to a diverse set of related yet tailored products built for specific devices, system designs or sales channels. Indeed, the company sees a future where memory products will be customized for specific applications, whether in financial services, oil and gas, automotive, media, medical devices or large telecom and cloud providers.

The problem for Micron and its investors is that it must first navigate the transition from relying on a secularly declining market, PCs, where margins are nonexistent, to a much more diverse set of products with exciting, but unproven (and unknowable) potential. This requires both higher R&D investment — it takes far more engineering to make dozens of customized products with short lead times and changing requirement than to mass produce widgets on an 18-month cycle time — increased marketing and new sales channels. Obviously sensitive to the concerns of current investors, Micron's CFO walked analysts through the company's capital management process including its targets for cash reserves, leverage and credit risk. In fact, the company's free cash flow has doubled sales and increased $1.8 billion in just four years (greatly aided by the Elpida acquisition) meaning the heavy CapEx investments that scared Wall Street will amount to less than 25% of sales.

Far from reacting to macro events and threats from larger competitors, Micron showed a deep, nuanced understanding of the memory market and technology trends. No doubt aided by the deep R&D bench at its strategic partner Intel, Micron has the pieces in place for long-term success. The question for investors is are they willing to wait out difficult short-term conditions or do they deploy cash elsewhere and come back after Micron has transformed it vision and slideware into new products and sales? Given the stock action, it looks like most have headed for the exit giving patient investors a much better entry point.

Update, 8/19/2015: The Idaho Statesman reported that Micron will undertake a major expansion of R&D facilities at its Boise headquarters. The $200 million project will add a 50,000 square feet fab and represents a 30% addition to Boise-based R&D space. In light of Micron's ambitious product and technology roadmap, this is unlikely to be the last CapEx announcement we hear from Micron in the coming year.

I am an IT analyst, columnist and proprietor of MarkoInsights, where you can find a compendium of my recent work and commentary. I regularly contribute to several technology Web sites and am a prolific author of in-depth IT reports. From the VT100 to the iPad AIr, for 30 yea...